We met with PMM and came away feeling neutral about the group’s prospects. PMM intends to reduce their reliance on manual labour by investing in automation. The ongoing capacity expansion should allow the group to reduce their reliance on external manufacturers and increase production output. Despite this, we only expect significant increased production volume by FY21 at the earliest. We keep forecasts unchanged as the meeting yielded no surprises. Maintain HOLD with an unchanged TP of RM38.75 based on 17x PE of FY20 EPS of 227.9 sen.

We met with PMM and came away feeling neutral about the group’s prospects going forward.

Sales outlook. Increasing trade sanctions to countries in the Middle East is expected to impact PMM’s ability to sell to the region. We note that sales to the Middle East have already declined 6.0% in 6MFY19 vs SPLY. Middle East accounted for 24.2% of PMM’s total sales in FY18 (Figure 1). Panasonic expects Vietnam and Philippines to grow as urbanisation in these countries are expected to result in increased shower heater and ceiling fan sales. Domestically, slowdown in the domestic property market is expected to affect sales as property developers remain key clients, particularly in the fan products division.

Capacity expansion. PMM have recently announced the completion of a new wing, which is expected to increase their Shah Alam production plant area by approximately 18%. The increased area is to be used to move the manufacturing of certain parts in house, reducing their reliance on external manufacturers. PMM guided that some parts manufactured externally have reliability issues. Currently, PMM shared that the factory is already working at close to maximum capacity. Going forward, PMM intends to increase capacity by another 41% by building an extension which is expected to cost RM103.0m. This project is expected to be completed by 2020. PMM intends to use the larger production area as an injection moulding facility and research and development operations.

Outlook. PMM intends to reduce their reliance on manual labour by investing in automation. The ongoing capacity expansion should allow the group to reduce their reliance on external manufacturers and increase production output. Despite this, we only expect significant increased production volume by FY21 at the earliest.

Forecast. Unchanged.

Maintain HOLD, TP: RM38.75. We maintain our HOLD call with an unchanged TP of RM38.75 based on 17x PE of FY20 EPS of 227.9 sen.

CIMB Research learnt that KESM’s utilisation fell below 60% in 1QFY7/19 mainly due to inventory adjustment at its immediate customers in light of escalating US-China trade war.

KUALA LUMPUR: CIMB Equities Research expects weak demand for semiconductor-related KESM’s products in 2QFY19F due to ongoing inventory adjustment from its customers, but expect stronger demand recovery in 2HFY19F.

It had on Wednesday cut its FY19-21F EPS by 7%-8% to reflect lower utilisation and sales growth assumptions in China, which is directly impacted by trade war.

“Retain Hold with a lower RM9 TP (12.8 times CY20F P/E). We prefer MPI,” it said.

CIMB Research learnt that KESM’s utilisation fell below 60% in 1QFY7/19 mainly due to inventory adjustment at its immediate customers in light of escalating US-China trade war.

KESM was also impacted by higher raw material costs related to the electronics manufacturing services. The group expects flattish sales in 2QFY19 due to ongoing inventory correction by its customers.

“In spite of the tepid near-term outlook, management is cautiously optimistic for a stronger 2HFY19 following healthy order visibility from its customers for February 2019.

“Nevertheless, it depends on the US-China trade war situation given that KESM’s operation in China has felt the reduction in chip testing volume. Apart from that, we still expect stronger demand and adoption of electric vehicles to drive semiconductor component demand, which bodes well for KESM,” it said.

CIMB Research said KESM is guiding for lower capex of RM40mil in FY19F (vs. RM48mil in FY18) in view of excess capacity following the last expansion in 2017.

To recap, KESM incurred RM10mil capex in 1QFY19. In addition, management highlighted that KESM's depreciation expense has peaked and should gradually decline after FY19F.

“We gather that management could reduce opex by cutting staff costs, but it plans to retain all staff for now in anticipation of strong demand recovery in 2HFY19F,” it said.

Read more at https://www.thestar.com.my/business/business-news/2018/12/12/cimb-research-sees-weak-demand-retains-hold-for-kesm/#zwSuzDhi5pjJyk7b.99